On the very first trading day of the year, the Nikkei, DAX, and S&P 500 gapped lower, setting the tone to a particularly challenging month for investors.  The last week and a half has been better, and this will likely carry over into the start of the new month.  Before January could slip into the history books, the Bank of Japan sprung a last-minute surprise by adopting a tiered system that includes a minus 10 bp charge to new excess reserves.

BOJ’s Kuroda was understood to have told a Davos audience a week earlier that the central bank was not considering negative interest rates.  Speculators in the futures market went into the two-day BOJ meeting with its largest net long yen position in four years and the biggest gross long yen position since 2008.

A few hours before the BOJ’s announcement, the government reported a poor set of economic data that raised the prospect that the Japanese economy may have contracted in Q4.  It contracted in Q2 and, what was initially reported as a further decline in growth in Q3, was subsequently revised away.  From the ECB’s meeting in early December through January 20, the yen appreciated 7% on a trade-weighted index.  It had already pulled back 2%  before the BOJ’s move and surrendered another 2% in response.

The BOJ’s action, which opens a new dimension to its monetary policy, as well as Draghi’s intimation that new measures are necessary for the ECB to meet its mandate,  are an effective antidote to claims among some that central banks had reached the end of the road.  If we had a nickel for every time such claims have been made over the past five years; we might be able to fund our own QE. Monetary policy remains central to the investment climate. This is not an anomaly. Going back to the late-1970s, this has been more often the case than not.

Among the major central banks, the Bank of England and the Reserve Bank of Australia meet. Neither central bank is expected to change policy.  At the most, McCafferty, the sole BOE member that has been advocating an immediate hike for several months, might rejoin the fold, but it signifies nothing.

Sterling’s 3.4% loss in January, the worst performing major currency after the New Zealand dollar (-5%), was driven by three factors. Disappointing economic data, recognition that it will take the BOE much longer to hike interest rates, and fears over Brexit. Slightly better than expected Q4 GDP, leaving H2 growth at the same pace as H1, failed to arrest the slide. Growth in Q4 was on a narrow base, and the PMIs, which will be reported ahead of the BOE meeting, are expected to continue to drift lower.